Bad medicine: the sale of Medibank Private

e) Sale to our very own sovereign wealth fund: the Commonwealth Government's Future Fund.

A critical flaw with the IPO process is that the seller sets a price range based on its understanding of the value of the asset being sold, and the alleged demand in the market. The Government's understanding is often a function of the documentation prepared for it by its advisors. The advisors are intimately involved in the sale and may well be investors to boot. Conflict of interest, anyone?

When the seller sets the range of prices, there is restricted competition between potential buyers so it is difficult for the seller to accurately gauge the full level of demand in an open market. Once book-building starts - the process by which the share price and the allocations to bidders is made – interested parties compete to buy shares and at this point may have incentives to reveal higher levels of demand. But by announcing a specific price range, the seller has effectively capped the price.

So how have IPOs fared around the world?

Lazard, an investment bank, was Her Majesty's Government principal advisor on the sale of Royal Mail. Lazard was paid £1.5m for its advice. It also invested in Royal Mail shares.

On the first day of trading, 11 October 2013, the shares listed at 330 pence and opened at 448 pence: 36 per cent above the IPO price. At the close of trading, Royal Mail's share price closed at 455 pence, up 38 per cent on the day.

The benefit of the share price rise on that day, a whopping £750 million was funnelled to the new shareholders: the deep pocketed and the well connected, at the expense of ordinary Britons.

Lazard, the savvy financial advisor waited until the day after listing to unwind its holding of 6 million shares, offloading them at 470p, making a sweet £8.4m profit.

That stellar mispricing robbed the Exchequer and by inference, the public. Put another way, this amount is close to what the government spent in the same year on pre-primary and primary education (£800 million).

Guess who's advising the Commonwealth Government on Medibank?

Notwithstanding the electoral appeal of offloading a state owned asset at a deep discount to Mum 'n Dad investors (who double up as voters), most IPOs have very serious flaws and result in massive transfers of wealth that can – if so wished - be easily be avoided.

In contrast to a one-off listing via an IPO, selling in tranches is an improvement. Say initially only 25% of the equity of Medibank was sold. Once the first tranche is allocated, listed and traded, a well-established market will exist into which the Commonwealth could offload the balance of shares at a more accurate price. That way any mispricing in an earlier tranche would be rectified in subsequent tranches.